R-CALF: NCBA’s proposal to change CME feeder calf index a ploy to artificially break cattle market
BILLINGS, MT – At the request of its marketing committee, R-CALF USA sent a formal letter March 8 to the Commodity Futures Trading Commission (CFTC), to urge the CFTC to deny the proposal by National Cattlemen’s Beef Association (NCBA) and the CME Group (parent of the Chicago Board of Trade and the Chicago Mercantile Exchange) to change the cattle weights used to calculate the Feeder Cattle Index on the grounds the proposed change is nothing but a deceptive ploy to break the currently favorable feeder cattle market, thus harming hundreds of thousands of cow-calf producers, backgrounders and stockers.
“We understand the proposal is under consideration by the CME Group and would cause the CME to drop the lightest of its four weight ranges presently in use (the 650-pound to 699-pound weight range) and add a new 850-pound to 899-pound weight range,” wrote R-CALF USA CEO Bill Bullard. “This proposal would effectively slide the entire scale upward by 50 pounds – rather than 849 pounds, the new, heaviest weight range would be 899 pounds, an increase of 50 pounds.”
NCBA reportedly claims the current weight range (from 650-pound cattle to 849-pound cattle) “misses enough heavier-weight cattle to create a slight distortion in the index, which is used at the end of the month to settle CME’s Feeder Cattle futures contracts.”
“What NCBA calls a ‘slight distortion’ in the index is not a distortion at all but rather is an accurate market reflection of the extremely tight supply of feeder cattle that exists today – the result of decades of depressed cattle prices that have decimated the size of the U.S. cattle herd,” Bullard pointed out.
The Feeder Cattle Index is an important price-discovery tool in both the cash cattle market and the feeder cattle futures market, as it provides the basis for determining the daily average market price for feeder cattle. The Feeder Cattle Index is used to valuate feeder cattle in the cash cattle market, as well as acting as a starting point to establish the average market price for feeder cattle futures trades.
“The effect of NCBA’s proposal to increase the weight-range used to compute the Feeder Cattle Index would be to reduce the per hundredweight value of the feeder cattle cash index, thus lowering the per hundredweight index value of all feeder cattle,” Bullard warns. “This is a function of the lower per hundredweight value accorded to cattle as their weights increase. Thus, NCBA’s proposal is designed to break the feeder cattle board, causing direct financial harm to every U.S. cow-calf producer, backgrounder and stocker that markets feeder cattle.
“NCBA’s proposal would literally transfer millions, if not billions, of dollars away from feeder cattle producers and directly to the packers and their cattle feeding operations…at the expense of hundreds of thousands of U.S. cow-calf producers, backgrounders and stockers who today are experiencing price-levels for feeder cattle that are helping them to recover from decades of depressed prices,” he concluded. “We urge the Commodity Futures Trading Commission to put an immediate stop to NCBA’s attempt to break the currently favorable feeder-cattle market by manipulating the principle tool used for feeder cattle valuations – the CME Feeder Cattle Cash Index.”
editor’s note: see “cme may change feeder cattle index” at http://www.tsln.com/article/20110219/tsln01/110219908, or page b1 of the feb. 19, 2011 edition of tri-state livestock news, for more background on this topic.
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